You may have already been put off sourcing products from China after hearing second hand horror stories from people who have been a victim to a scam. Unfortunately, scams are not unheard of, and when it comes to international money transfers, the risk always increases. However, if scams were as common as some believe, it would make no sense for anyone to source from China.
Other outcomes besides purely having your money taken without receiving a product also include having your intellectual property stolen. This may be your product designs being taken and created by Chinese firms, or even as far as pure imitations being made to pass off as a legit product from your own brand.
This article will take a look at how trustworthy Chinese suppliers actually are, and what you should look out for to reduce your risk of falling victim to a scam or from being exploited.
In terms of pure scams, the most frequent is a buyer pays a supplier for a batch of goods that they never receive. As soon as the money has been transferred, communications cease. This scam can affect companies looking to place a significant order, to small private resellers who are purchasing a much smaller quantity.
Alternatively, another common issue companies run into is receiving goods not up to the expected quality. Even if the supplier has provided a sample for you to review prior to making an order you can still receive below par goods.
Another aspect to carefully consider prior to making an order, particularly if you are designed and patented the product you are paying to be produced, is the risk of your designs being stolen. For many, this is the driving factor to why they refuse to look towards China for manufacturing. Generally, this only affects larger companies with a unique design, as smaller importers are generally buying ODM type goods (products already designed).
There are also various other types of fraud that can be encountered when ordering from China, and while we will not touch directly on them in this article, all the advice provided will be useful for avoiding becoming a victim.
You can never completely eliminate the possibility of falling victim to a scam. This is true when it comes to China, but also anywhere in the world. However, if you do everything you can to reduce the possibility then chances are you will never encounter a circumstance of being defrauded.
When Searching for Suppliers
When most people look to find a Chinese supplier one of the first steps they take is looking online at a supplier directory and trying to find a suitable company. These is usually conducted through popular sites such as Alibaba or DHgate. Considering that these are some of the most well-known sites you can expect that among the thousands of legit suppliers there will be rogue companies looking to take advantage.
When searching these sites, it is best to try and verify as much information as possible prior to making an order. For example, Alibaba.com has a system which shows whether they have verified a supplier. Those who have passed the check are rewarded with a gold supplier icon, indicating they have a higher level of trustworthiness. On Alibaba.com, the 3 different icons a company can have are an: A&V Check, Onsite Check and Assessed Supplier Check. To get gold status, a company only has to pass an A&V Check or Onsite Check, which verifies information such as the company’s business license and contact information.
The highest indicator of trustworthiness is whether a supplier has the Assessed Supplier Icon. This verifies all the company’s information, from certifications, factory quality, R&D abilities, production flow and much more. However, this does not guarantee the company is to be completely trusted if they have this icon, but it does help reassure the user. Furthermore, if a company does not have this icon, it does not mean they are a scam. However, you should be more proactive in trying to verify further information to ensure the operation is legit.
Placing Smaller Orders
Another way you can reduce risk is to place a smaller order than you initially want. Financially, the damage is much more severe if you are defrauded out of the money from an order of 100,000 units, rather than 1,000. It is also recommended to ask for a sample, which may come at a cost. This may show that the company has the ability to produce the quality you are looking for, however, companies have been known to send a “golden sample” which does not reflect the quality you will receive.
Protecting Intellectual Property Rights
Intellectual Property Rights (IPR) is a term that refers to an invention, design or brand that a company has legal rights to own. This encompasses copyright, patents, trademarks and designs. Many companies fear that by using a Chinese supplier the IPR’s they own are completely ignored. This is not necessarily the case, but getting those IPR’s enforced can be difficult. However, there are select processes that can be conducted to increase the level of enforcement Chinese authorities will enact.
It is highly recommended to register all IP within China, and to also have a Chinese law firm help your company through the process to avoid any complications at a later date. For copyright, you should register with the State Copyright Bureau, for trademarks, with China Customs and patents with the State Intellectual Property Office (SIPO).
There can be many different terms and conditions that need to be navigated for successful approval, and many processes demand that foreign companies use a Chinese agent. While this may sound like a costly process, it not usually too expensive, and can save significant sums of money in the future.
Enforcement is another issue, however within China it usually consists of either administrative action or civil litigation.
The best method for reducing exposure to potential problems is through anticipating potential problems. A combination of professional advice from Chinese IPR’s experts, risk assessments, registers your rights within China and using professionally drafted contracts should usually be enough to protect yourself.
If you are interested in reading more about IPR’s and China, you can check out our entry into our very own Trade Wiki found here.
Many companies and individuals have greatly benefited from the advantages intermediary services are able to offer. Simply put, an intermediary company acts as a link between a buyer and a supplier to make everything run smoothly. The majority are based within the country you are looking to import from, and usually consist of an experienced team and a network of trusted suppliers.
This adds a layer of protection, as you know the supplier has already been vetted. Furthermore, they can also offer services beyond simply sourcing, including on site factory inspections, container load checks, production monitoring and much more.
Larger companies often want to travel to China directly to the factory to carry out these inspections themselves, and this is certainly a good idea. However, hiring a 3rd party company is much more cost effective, and suits the needs from small companies to large enterprises.
One of the key signals that a product is up to quality is whether or not it has a certification. There are many different types, and are usually represented by a mark on the final product. Certifications usually show that the supplier has managed to meet an externally set quality standard which should set your mind at ease. However, companies have been known to forge these certifications, and you should verify this information before making an order. This can be done by contacting the body that issued the certification. Even if the certification is legit, you should ensure that it is for your product, rather than for another.
Another area that opens up the possibility of being scammed by a supplier is the payment method used. By far the safest method is usually using an intermediary company or sourcing agent, as they usually assume the risks involved. However, other popular methods include PayPal, credit cards, international transfers, online escrow services, letter of credits and cash. Each one has their own levels of risk involved, and even if a supplier only accepts one method which seems to offer low protections for the purchaser this does not mean they are necessarily scamming.
You may wish to browse around until you can find a supplier willing to conduct the transaction with your preferred method of payment. This may make you more comfortable, and should reduce the risk if you prefer a method like online escrow which has various buyer protections in place.
For a more detailed look into how you can pay Chinese suppliers, consult our Trade Wiki entry here.
Overall it is impossible to reduce the level of risk to 0%. However, this guide should hopefully give you some ideas in what you can do to try and reduce the risk as much as possible. While it is not unheard of for companies to encounter scams, they are by no means a widespread occurrence. As long as you are careful and conduct due diligence and research you should not run into any problems.